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spk04: Hello, and welcome to the Q3 2023 Neighbors Industries Limited earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. I would now like to turn the conference over to William Conroy, Vice President of Investor Relations. Please go ahead, sir.
spk01: Good afternoon, everyone. Thank you for joining NABR's third quarter 2023 earnings conference call. Today, we will follow our customary format with Tony Petrello, our Chairman, President, and Chief Executive Officer, and William Restrepo, our Chief Financial Officer, providing their perspectives on the quarter's results along with insights into our markets and how we expect neighbors to perform in these markets. In support of these remarks, a slide deck is available, both as a download within the webcast and in the investor relations section of neighbors.com. Instructions for the replay of this call are posted on the website as well. With us today, in addition to Tony, William, and me, are other members of the senior management team. Since much of our commentary today will include our forward expectations, they may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks and uncertainties, as disclosed by neighbors from time to time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may vary materially from those indicated or implied by such forward-looking statements. Also, during the call, we may discuss certain non-GAAP financial measures, such as net debt, adjusted operating income, adjusted EBITDA, and adjusted free cash flow. All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA, as that term is defined on our website and in our earnings release. Likewise, unless the context clearly indicates otherwise, references to cash flow mean adjusted free cash flow, as that non-GAAP measure is defined in our earnings release. We have posted to the investor relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. With that, I will turn the call over to Tony to begin.
spk02: Good afternoon. Thank you for joining us as we present our results and outlook. Activity in our major global markets was essentially in line with our expectations. Rig count in the lower 48 declined in the third quarter. It appears to have reached the bottom. Leading edge pricing seems to have stabilized. Lower drilling activity in the U.S. impacted results in our neighbor's drilling solutions and rig technology segments. The new build rigs in Saudi Arabia were a source of disappointment, as reflected in our third quarter results. Specifically, the issues included delivery delays by our local supplier, field performance challenges with certain of the new build rig components, and higher startup costs as we addressed these challenges. The impact to EBITDA in the third quarter was approximately $5 million. We have now addressed the existing quality issues. We expect our suppliers' performance to improve rapidly as their local manufacturing experience increases. On the positive side, our lower 48 margins remain at historically high levels, and international rig markets provide us with multiple opportunities at attractive pricing. For the third quarter, adjusted EBITDA totaled $210 million. This result principally reflects the known decline in lower 48 drilling activity, as well as the shortfalls in Saudi Arabia. Our global average rig count for the third quarter declined by eight rigs, all of which was attributable to the U.S. Our drilling solutions and rig technology segments together accounted for 18% of total EBITDA. This contribution is approximately double the proportion immediately pre-COVID. Next, let me make some comments on each of our five priorities. First, performance in the U.S. Daily rig margins in our lower 48 operation were in line with our expectation. Pricing in this market reflects the reduction in industry utilization this year. Please note that our margin performance in the third quarter was higher than that of any quarter prior to 2023. Our reported lower 48 daily rig margin reflects the financial results of just our drilling rigs. On top of that, neighbors' drilling solutions portfolio generates significant additional margin. I'll discuss this in more detail in a few moments. Now I'll discuss our international drilling business. In the quarter, we stood up a new-build rig in Saudi Arabia and a rig in UAE. These units are the first two of the 13 pending international startups that I detailed last quarter. Profitability improved substantially in several international markets, primarily in Latin America. Let me add a few more comments concerning the new bill program in Saudi Arabia. The fourth rig deployed in the third quarter. The fifth was also expected to start in the third quarter. Although construction of the rig has been completed, its start date has been pushed to the beginning of next year. The aforementioned supplier issues caused this delay. This timing mismatch between the capital outlays and the commencement of EBITDA had a negative impact on free cash flow in the quarter. The second tranche of five rigs is currently under construction in the Kingdom. We currently expect the first of this group to spud in the first quarter of next year. Two of the remaining four rigs should be deployed by the third quarter of 2024. The last two rigs of that tranche are expected to spud in early 2025. Saudi Aramco recently awarded the third tranche of five new bills. We expect to deploy the first of these rigs around mid-year 2025. In general, the outlook for international business, including Saudi Arabia, remains quite positive. Coming out of the third quarter, we have 11 deployments expected through the end of 2024. Beyond these, we see improving prospects for additional rigs across a number of markets. Kuwait, Algeria, and Oman in the Middle East, and Argentina and Colombia in Latin America. Next, let me discuss our technology and innovation. Growth in NDS's international business actually accelerated in the third quarter. Managed pressure drilling and casing running drove this growth. NDS's U.S. business was impacted by reductions in overall rig activity. Third party revenue offset some of these reductions. Next, I will detail the value that NDS generates in the lower 48 markets. The average daily margin in the lower 48 from our drilling and drilling solutions businesses combined was over $19,000 in the third quarter. Of that, NDS contributed approximately $3,400 per day. This significant incremental margin contribution comes with limited capital spending. Thanks to the low capital intensity of the NDS portfolio, the returns on capital are the highest in our company. In the third quarter, penetration of NDS services held steady on neighbors' rigs in the lower 48 at nearly seven per rig. Once again, we saw an increase in installations of our SmartSlide directional steering system and our SmartNav directional guidance software. Our volume of casing running jobs also grew sequentially. Our NDH portfolio remains robust. We have seen increasing interest both domestically and internationally, including for our software solutions on third-party rigs. Next, let me offer an update on our capital structure. Our free cash flow generation and debt reduction were challenged in the quarter. Most of the items impacting our liquidity were one-offs or resulted from shifts in expected timing between quarters. We are addressing the impact of the issues in Saudi Arabia that I mentioned in order to recapture our momentum. The entire company remains focused on increasing free cash flow and reducing that debt. I can assure you these goals remain our top priorities. I'll finish this part of the discussion with remarks on sustainability and the energy transition. Our energy transition initiatives, as you know, focused on making a difference on neighbors' own emissions profile and exporting solutions to other verticals. These technology solutions already contribute visible margins. The first of these is our PowerTap module. This unit connects rigs to the grid. At the end of September, we had 23 modules running. More than 20% of those were on third-party rigs. We have commitments in hand to add two units in the fourth quarter. Notably, one of these is our first power tap unit incorporating a frequency converter for the international market. This allows our rigs working in certain markets to tap into the local grid. We believe this is an industry first. In addition to the unit now deploying, we expect three more international deployments by early 2024. Second is the Nano 2 diesel fuel additive, which improves engine performance and reduces emissions. We have treated more than 22 million gallons of diesel to date on both drilling rigs and pressure pumping units. In the third quarter alone, that increased by 10%. Quarterly revenue and EBITDA from our energy transition portfolio once again increased versus the prior quarter. We see a path to further growth across the client base, both on neighbors and third-party rigs, as well as in other verticals. Now, I will spend a few moments on the macro environment. Notwithstanding the volatile environment, as well as the decline in rate count in the quarter, commodity prices remain constructive for operator economics. Compared to our last earnings conference call, oil prices are up more than $10 a barrel. We believe this oil price environment is very positive for international markets. We are still of the view that several large LNG projects along the Gulf Coast will support drilling activity for gas, especially in the Haynesville. These commodity prices form a favorable backdrop for operator economics. However, the combination of operator capital discipline and consolidation could temper the scale-up in U.S. activity that we have normally seen at these higher prices. Recently, we have noted two announced mergers involving U.S. majors. These transactions indicate their confidence in the future of the U.S. hydrocarbon business. As I mentioned, given this backdrop, international prospects, particularly those driven by national oil companies, remain favorable. Our balanced geographical portfolio positions us well to capture U.S. growth in 2024 and to capitalize on these international opportunities. Some overhanging risks nevertheless remain. These include... sustained higher interest rates, if not additional increases by the Fed, and looming geopolitical concerns across several geographies. Next, I will spend a few moments on the rig pricing environment. Our third quarter results for the lower 48 reflect stabilization of leading edge market prices. As I have emphasized in the past, these current rates for our highest spec rigs exceed all of the pre-23 market highs. Our focus in the lower 48 market remains profitability while continuing to serve our valued customers. As such, we continue to demonstrate the worth of our technology portfolio with MDS. As I mentioned, in the international market, we still have visibility to 11 additional rigs through 2024. This growth should provide substantial uplift potential. Given the commodity price backdrop, we believe there is room for additional unit additions in the Middle East and Latin America. As rig utilization across these markets improves, we expect rig pricing will increase further as well. Once again, we surveyed the largest lower 48 clients at the end of the third quarter. Our survey covers 17 operators, which account for approximately 45% of the working rigs at the end of the quarter. The survey indicates this group will add about 6% to its rig count through early 2024. This increase is spread across nearly 50% of the surveyed operators. We are encouraged by the distribution of this planned increase. With the expected international additions, we would increase our international rig count by 15% by the end of next year. Let me wrap up my remarks with the following. We expect our financial performance to improve materially in the fourth quarter. as we remain committed to increasing cash flow, reducing that debt, and greater returns to our investors. Now, let me turn the call over to William, who will discuss our financial results and guidance.
spk03: Thank you, Tony, and good afternoon, everyone. Our third quarter financial results reflected primarily the expected reduction in lower 48 activity with an associated leading edge price and decrease. As anticipated, our U.S. offshore results fell as we completed planned annual maintenance on critical components for the largest rig. I will also point out that results in Saudi Arabia, despite their quarter-on-quarter activity increase, fell materially short from expectation. Results were mainly affected by the disappointing performance and quality assurance by the supplier of our new builds. Standard experience delays in delivery and commissioning of the new build rigs which cost them significant revenue and which we only partially anticipated. These delays were compounded by unexpected downtime and newly delivered rig components by the same manufacturer. We are now forecasting additional loss margins in the fourth quarter from these issues. The drilling activity reduction in the lower 48 also impacted our NDS results more than we expected, driven by higher than anticipated rig count reductions in the general market. These affected our ability to increase penetration on third-party rigs. On the positive side, we continue to experience tailwinds in most international drilling rig markets, particularly in Latin America and throughout the Eastern Hemisphere. Revenue from operations for the third quarter at $734 million declined by 33 million, or 4%, as compared to the second quarter. Revenue for our U.S. segment at $276 million fell by 38.4 million, or 12%. This decrease reflected an eight-rig sequential reduction in lower 48 rig count. Revenue per day of $35,700 fell by $1,054 from the second quarter level. U.S. offshore revenue was $6.5 million lower sequentially, as our largest platform rig completed its planned annual maintenance for major components. In addition, a second rig was placed on standby rate by our customer through the end of the year. Our international segment reached $345 million, a $7 million or 2% improvement over the prior quarter. This expansion was driven by an additional new-build rig deployed in Saudi Arabia, as well as strong increases in Argentina and Mexico. These positive outcomes offset the end of contracts in Kuwait and Colombia. Nonetheless, the magnitude of the increase was disappointing due to the aforementioned delays and quality assurance issues on the new bills. These issues cost SANA the total of $5 million in foregone revenue during the quarter. Neighbors drilling solutions and rig technologies were both affected by the reduction in U.S. rig count during the third quarter. The combined revenue impact for the two segments was approximately $6 million sequentially. Revenue in our drilling solution segment declined by 5% to $72.8 million, reflecting the lower drilling activity in the lower 48 market. There were, however, a couple of bright spots to highlight. Despite the headwinds in the broad U.S. drilling rig market, NDS revenue continued to grow with third parties. Compared to the second quarter, NDS increases U.S. third-party revenue by 8%. International revenue also continued to expand, increasing by 8% sequentially. Total adjusted EBITDA for the quarter was $210 million, 25 million lower than the second quarter, a 10.6% decline. Nearly all of this decline was in the U.S. drilling segment, which reported EBITDA of $117.4 million, down by 24.1 million or 17% sequentially. This was driven by the activity reductions in the lower 48 market. Lower 48 drilling rig EBITDA decreased by $18.2 million or 15.3% compared to the prior quarter. Average rig count of 74 declined by 10%. Average daily rig margin of almost 15,900 was in line with expectations. and represented a reduction of about $1,035 per day, or 6%. Operating expenses were in line with the prior quarter. We believe leading edge prices, as well as costs, have stabilized. For the fourth quarter, we project our average daily rig gross margin between $15,000 and $15,200, driven by the repricing of renewals as rigs roll to new contracts. We're targeting flat operating costs. During the third quarter, our rig count went as low as 70 rigs and exited the quarter at 71. On a net basis, Alaska and the U.S. offshore businesses performed better than we anticipated. In the third quarter, the combined EBITDA of these two operations was $16.5 million, a decrease of $5.9 million. reflected planned downtime for the top drive upgrade and recertification on our M400 rig in the Gulf of Mexico. Combined EBITDA for Alaska and US offshore should improve by $1.5 million in the fourth quarter, with a full quarter of M400 operations partly offset by planned maintenance on two rigs in Alaska. International EBITDA decreased by $2.2 million, or 2.2%, to $96.2 million. Average rig count and average daily gross margin were lighter than expected, largely driven by the new-build challenges in Saudi Arabia. In addition to the material foregone revenue, we still had to absorb compensation and other costs on these non-performing rigs. For the quarter, average rig count remained at 77. Average daily gross margin came in approximately at $15,800. The SANA issues affected our international daily margin by about $700. We project international average rig count in the fourth quarter to increase by one to two rigs, driven by redeployments in Latin America. And for average daily gross margins, we are targeting between 16,200 and 16,300. Drilling Solutions posted adjusted EBITDA of $30.4 million in the third quarter, down $2.3 million. This was primarily driven by the decline in the neighbor's lower 48 grid count. Although international and third-party revenue did well during the quarter, some of our third-party target clients reduced their activity, which cut our opportunities for additional expansion in this market segment. We expect fourth quarter EBITDA for drilling solutions to increase by approximately 10% over the third quarter level as we continue to grow in international markets and add third party activity in the US. NDS gross margin per day for the lower 48 was $3,388. Our combined drilling rig and solutions daily gross margin closed at $19,243. RIC Technologies generated EBITDA of $7.2 million, a 12.7% increase versus the second quarter. This improvement was primarily driven by higher margin aftermarket sales and services, as well as higher penetration of our energy transition technology. We expect RIC Technologies EBITDA in the fourth quarter to expand by approximately 20%, reflecting expected year-end sales of RIC components and additional increases in energy transition revenue. Now, turning to liquidity and cash generation, pre-cash flow for the third quarter, at just under break-even, fell below our target, mainly due to higher capital expenditures of $33 million, which reflected the accelerated timing of investments in Saudi Arabia and the U.S. This should result in lower than previously expected CapEx in the fourth quarter. In addition, our accounts receivable balance and other working capital items were some $40 million higher than we expected. In addition to this working capital impact, lower EBITDA than planned negatively impacted free cash flow. In the fourth quarter, we expect overall CapEx to decrease significantly and the Q3 working capital impact to reverse itself. We expect free cash flow for the full year 2023 of between $225 and $250 million, as compared to our previous expectation to generate between $300 and $350 million. The reduction includes $40 million of incremental capex during the second half. Our Algerian deployment has been moved up. We expect to spend approximately $20 million in capex before year end in preparation for the four-rig multi-year contract. We also decided to spend $10 million in purchasing a rented base in Argentina's Vaca Muerta Basin. The opportunity to purchase this critical facility presented itself after unsuccessful attempts in previous years to lock in our major operation space for the long term. Finally, although SANA new-built CAPEX in the third quarter was essentially an acceleration from the fourth quarter, We now expect about $10 million of 2024 CapEx to move into late 2023. Capital expenditures in the third quarter were $157 million, $4 million higher than the prior quarter. This amount, including investments for the Sun and New Build program, of $52 million. For the fourth quarter, we expect capital expenditures of approximately $95 million, including $35 million for Sun and New Build. For the full year, we are targeting $520 million, of which $190 million are persona nubile drigs. In conclusion, the third quarter EBITDA and free cash flow were unfavorably affected by one-off events, as well as items that shifted between quarters. Excluding these items, the underlying results for our international segment continue to progress, and we expect further acceleration ahead. Just as importantly, the trends in the lower 48 proceeded as we had forecast. And I believe we have seen a bottom in rig count and pricing. We also anticipate that U.S. drilling, NDS, and rig tech will benefit from a meaningful uptick in activity in 2024, driven by an expected recovery in gas drilling. Increased EBITDA in 2024 versus the prior year, as well as sustained capital discipline, should result in higher free cash flow next year than what we now forecast for full year 2023. We will continue to allocate this cash generation to debt reduction throughout 2024. With that, I will turn the call back to Tony for his concluding remarks.
spk02: Thank you, William. I will now conclude my remarks this afternoon. Notwithstanding challenging market conditions in the U.S., we expect a material improvement in our consolidated financial results for the fourth quarter. In the lower 48, we expect to grow our rig count this quarter from its current level. As we look to put rigs back to work, we remain committed to our pricing discipline and expense control. Our international segment has excellent visibility to significant growth through 2024 and beyond, and additional opportunities are already emerging across our major markets. The international portion of our NDS segment is also growing as those clients realize performance benefits from the NDS solutions portfolio. In the U.S., we continue to focus on increasing penetration on our own rigs as well as on third-party units. We are encouraged by early signs of an acceleration in rig technologies, especially for capital equipment in the international markets. On top of that, we have high expectations for RigTech's energy transition initiatives. We remain committed to our goals of free cash flow generation and net debt reduction. We expect to report improvements in both metrics this quarter. That concludes my remarks today. Thank you for your time and attention. With that, we will take your questions.
spk04: Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To throw your question, please press star then 2. At this time, we will pause voluntarily to assemble the roster. And the first question comes from Derek Podhiser with Barclays.
spk05: Hey, good morning. Just wanted to ask you about the 14 warm stack rigs you highlighted in the press release. You mentioned these things are ready to go. Just maybe give us some more color around your expectations on when those should be deployed, the cadence of deployment, maybe the customer type, the basin. Just help us with those 14 rigs as you look at them through 2024? Sure.
spk02: Well, in terms of customer types, obviously, we've seen a bit of a shift from the privates to the publics from where we were a year ago, and I think that shift is going to continue given other developments. In terms of basins right now, I think the most attractive right now is South Texas due to a combination of interest and rig availability. West Texas, there's been some redeployments of existing equipment there, and there's no operator churn. But at the same time, we're seeing slight increases. And based on our survey, we see a pickup in early 2024 with budgets reloading. East Texas and Northeast, as William alluded to, those are gas-driven. And right now, we see some stability. In fact, we think pricing, which had been disconnected from oil, is actually firming up. That gap between oil and gas is actually narrowing. So that's another area. And then finally, North Dakota. As you get into winter, that activity is going to be pushed into next year more, but there's some recent stuff now, but then later in the year. So pretty much in each of those markets, northeast, I'm not so sure we see much in the northeast for us right now.
spk05: I guess how many of those 14 do you think you can add back by the end of 2024?
spk03: It depends on customer demand, Derek. I mean, it's a bit early to be hazarding that, but if the demand is there, we'll be ready.
spk05: Got it. Okay, that's helpful. Just follow-up. Just wanted to ask about 2024 CapEx budget. Any help you can give us as far as color, maybe some bookends, how we should think about it between the U.S., international, Sanad, technology, anything, just to give us some preliminary guidelines here?
spk03: I think Sanad will be similar to this year, maybe slightly higher, because the supplier is going to get better and probably deliver those rigs a little bit more reliably than they have in the past. we'll have a significantly higher rig count. And as you know, the maintenance capex is directly correlated to the number of rigs, so that will go up. So those are the areas where we see. On the other hand, we won't be buying a base in Argentina, and some of the things we have absorbed in places like, you know, Algeria will not repeat. So we will see, I would expect to see capex higher than this year. But we haven't yet finalized our budget exercise. And as you know, CapEx is a competition between different geographies. So, you know, we are shooting to have a number that's going to be constructive in terms of free cash flow generation next year. But we're not ready yet to share that with our investors.
spk05: Great. No, that's helpful. That's all I got. I'll turn it back. Thank you.
spk04: Thank you. Thank you. And the next question comes from Arun Jayaram with JP Morgan.
spk00: Yeah, good afternoon. Tony, I just wanted to go through some of the challenges you talked about in Saudi Arabia in the quarter. How has this impacted the future timing of the new build schedule? Is this going to be kind of compartmentalized to this year, or does it have kind of a knock-on effect? And I know you gave us a bit of color around, you know, four startups next year and five beyond that.
spk02: Correct. Well, let me give you some context first. First of all, the new build program vis-a-vis what Neighbors normally does in countries is kind of sui generis because, as you know, in this particular operation, it's unique because Aramco has committed over 10 years for us to build these 50 rigs, five a year. But also, this was part of Vision 2030, and they wanted to source the manufacturing in local country, and they award that sourcing contract to a joint venture between them and NOV. So unlike where neighbors normally does stuff or sales and controls and all, that's different. And also, the fact was that that joint JV called ARM had no infrastructure. So they had to build a new facility. They have to get up to speed. They had no inventory, all that stuff. And all that was occurring at the same time the new bill program started to get underway. So, the only thing I can tell you is that we're committed to follow Ramfell's wishes. I'm trying to make this work. We actually have a 30-year relationship with NOV, so we respect them. But it's hard, and this is actually a very big project. And there's a lot of strain in the system when this stuff happens. Ramfell has very deliberate acceptance testing processes and procedures. And what's been going on on these rigs is, given it's all a startup operation from a manufacturing point of view, you know, the acceptance procedures are taking somewhere from two to three months just to go to acceptance testing, never mind submitting things that are coming up. And then there's issues of stock inventories for stuff that's never been there in the country before and all those kind of challenges. So that's what's stretching everything out, and that's what's creating great attention. But notwithstanding that, I think we've really had some great success this year in terms of getting these rigs on payroll. And as we said, you know, we have great visibility here right now in terms of next year with the four more rigs next year and the beginning of the second sponge. So as William said, the fifth of the first sponge is going to be pushed to the first quarter. Obviously, that rig, as we alluded to, is already built. But again, for all these problems, we have to make sure the base rigs are all working in the right way. That's the foundation here. So it's in everybody's interest to make sure they all get up to snuff the exact way. And then it should become cookie cutter as you go forward. So that's why the time is being spent here. And obviously that all drives extra costs because if you have a rig and you've been crew planning for the rig and then the acceptance testing gets strung out, then we have all that extra crew expense as well. So that's what's driving a lot of this extra expense here. So that's the concept. And then the last thing I make is two other good points here is we've also told you that the third tranche, has also been announced, which is going to start in 2025. Again, that just shows Ramco is really getting behind this thing now. And the fact that they're announcing it so early when 2024 is not even yet delivered, the second tranche shows that their intent on pushing everybody to actually get the program going. So like I said, everybody's motivated to get this to work. I'm sure our friends across the street feel the same way. And we just want to make it work and get this cadence down. In terms of numbers and impact, I think this is probably the least appreciating of what Neighbors has today, actually. The four rigs that have already been put on the payroll next year, combined with the four that are going to be added, are going to be more than $40 million in incremental EBITDA.
spk03: 50 to 60, roughly, actually, to be precise.
spk02: Yeah, well, yeah. So anyway, the magnitude, as you can see, is very large. And therefore, That gives us great visibility. And when you add that to the 11 rigs that you know about in other markets, I think international is really poised for a really great upturn here. And we can talk a little bit more about that context. But hopefully that answers your questions about Saudi Arabia. If you have any other ones, I'll be happy to follow up with questions.
spk03: Let me say something that Tony said that I think is very interesting and a lot of people are not seeing is that we still have some 11 rigs that have been awarded that are going to be deployed before the end of the year 2024. And then we have another seven already awarded that would be deployed in 2025. So that's what are between the beginning and the end of 2025. So there's 18 more rigs that are coming on the payroll over the next couple of years. And that's huge growth based on our 77 base.
spk02: Yeah, I would say there's nothing like that in the sector or there's ever been that much planned growth committed to in the land drilling sector ever at these kind of numbers. It really is unparalleled. And then, as I said, and then you have away from Saudi Arabia, you have the other things that's going on in the macro environment.
spk00: Great. Thanks for that color on the international. Appreciate it. I'll turn it back.
spk04: Thank you. And the next question comes from John Daniel with Daniel Energy Partners.
spk07: Hey, guys. Thank you for including me. Tony, just a big question. picture question for you, but let's assume Middle East tensions, the situation escalates, and energy security fears ramp even higher. How quickly can you just ramp your international business, not country specific, but just broadly speaking, how quickly could you ramp it further?
spk02: I would say very quickly, actually. That's the benefit of having the integrated infrastructure that we have. And so... You know, we actually have a bunch of assets around the world in various places that form the outlines of something. And adding them and refurbishing them and bringing a lot of stuff is what we do every day. And that is just a question of the opportunity. So if that comes up, whether it's enhanced energy security here in the U.S. or there's other markets that need it, I think that is really the power of the company that we have today. And that's actually what makes us different than everybody else. John, as you know. And so that is really the strength of the company. And I think we're positioned to meet that.
spk07: Okay. And I guess sticking with the energy security theme, are you seeing any change in behavior with people looking for longer-term contracts on equipment just to know they've got it? Or is it too early?
spk02: Too early. Although we have gotten inquiries from the Middle East, we've had a number of On the can rig side, actually, we've gotten a number of inquiries from what you might call our local competitor companies. These are companies that we don't really compete with because they typically drill in the shallower part of the market or they're captive companies for certain markets where the national oil company controls it more. And those companies, we've had a lot of inquiries recently reaching out, asking about equipment and sizing things up. I mean, this goes consistent with the theme that William alluded to, which is the overall international arena here. I mean, just to give you an idea, there is a way from Saudi Arabia, I may have a list here, just to give you an idea of the breadth of what's going on internationally. I mean, you've heard the big, all the big boys, all the service companies, they've all talked about super cycles and things like that, but let me, I can illustrate the following way. Let me give you a list of countries, Kuwait, Algeria, Oman, India, Abu Dhabi, PNG, I mean, Papua New Guinea, Argentina, Mexico, Colombia, Venezuela. Those companies today have tenders out what we have in hand for more than 50 rigs. Okay. All right. I've never seen, this is really something that we've never seen before, this kind of scale. It's kind of stunning. And what's the reason for that? I think the reason, alluding to what you're talking about, which is the security thing. I think the NOCs appear driven to increase the production capacity. That's clearly a big driver of it. Second, obviously, the geopolitical events, obviously, are also reordering the flows of oil and gas, including into areas like North Africa, where you're going to see people there that up to now put a higher priority on increasing their production. And then finally, I think we're all underestimating the fact that all these major oil and gas countries are their internal energy consumption is increasing themselves. And so that also is a driver. So you put all this together, and the fact of lack of investment, what's gone on the past five years, that's what's generating all this activity. Now, will this all result in that number of rigs being awarded? I'm not going to. I'm not overselling that, but I'm just trying to give you an idea to respond to your question of inquiries. When you have that many tenors out, you can see why Canvig is getting inquiries from everybody in the world because they want top drives. They want things to be upgraded. They want all kinds of things, and so that's what's driving the activity.
spk07: Thank you. That's very good color telling. I appreciate your time.
spk04: Thank you. Thank you. And once again, please press star, then 1 if you would like to ask a question. And our next question comes from Dan Cutts with Morgan Stanley.
spk06: Hey, thanks. Good afternoon, guys. So I wanted to ask on the lower 48 activity, it looks like you guys have kind of stayed in a pretty consistent market share range recently, which is a little bit lower than maybe we saw in some past years, but that seems consistent with your strategy and what you're saying about about being disciplined in your bidding, managing costs, and kind of trying to defend margins as much as possible. But I wanted to ask, is there a scenario where you could gain some market share and still achieve all the other stated goals? Or do you think that we're kind of at a fairly steady state from that perspective, and it's just going to be more the macro backdrop that will be the biggest driver of your lower 48 bid count. Thank you.
spk02: Well, obviously, we do like to grow, but we like to grow profitably, and so there's always that balance. And what we've tried to prioritize in our thinking is focusing on customers that also have a similar view to us as the adoption of technology, because as you know, the rig count, or rig margins, one thing, but the added benefit of NDS margins on these rigs also is material enhanced, or not just of absolute margin, but also of return on capital, because the NDS quality of that EBITDA is much higher than also the base drilling business, where the cash conversion rate is almost 80% of the EBITDA, the cash conversion. So that's where the priority is, and And we think that as customers begin to get the story of NDS more and more and learn about the product line, that that offers great expansion opportunities to help drive the rig sales, and it also helps to drive the use of NDS on third-party rigs. And you saw in this quarter something quite interesting, which was even though our rig count dropped, NDS actually grew in third-party business, which is interesting in and of itself, which proves the concept that What we're trying to unlock with this stuff is something that actually has a broader applicability away from just neighbor's rigs. So the answer is, yes, I do believe as the market matures, as the big players take a bigger position in the US market, and they are more technology focused, that there is an opportunity to gain market share. So one example of that is the focus on, with the consolidation that's occurred, I think one of the things people will be focused on is improving EOR, not just drilling wells faster. As you know, the industry's done a great job drilling wells very, very quickly. And at a certain point, there's going to be a law of diminishing returns. So I think some of the metrics may go to looking at EOR per lateral foot drilled. And I've actually seen some of the big guys talk about that, increasing lateral length as much as five miles. And that kind of stuff benefits neighbors because we've pre-invested in that move. We built The M1000 rig, which was the successor to the X-ray a couple years ago, has a million-pound hook load that's perfectly designed for these longer lateral lengths. We also introduced to the market a new top drive that has the highest torque available that can actually handle a five-mile lateral. So the company has positioned itself to capture that moment. And I think when the market moves in that direction, all these were bets we made the past couple years. as the market moves in that direction, I think it will help us also with share. So that's a pretty long-winded answer, but I hope it's responsive to what you wanted.
spk06: No, that's great. It was a long-winded question, so thank you. And then I guess just another one on the international space. So if I back out the SNOD rates that are working today, you guys are somewhere in the low-mid 70s. And then if I look back to... kind of the pre-pandemic period when the SNOD program hadn't kicked off, you guys' international activity was another dozen, two dozen above where your ex-SNOD activity is now. What I'm basically trying to frame or understand is what do you think the potential is in the international space just to kind of get back to the level of investment and activity that's required to kind of get back to a normal production level. And then on top of that, you have all of these capacity growth targets that a lot of the Middle East players have put out there. But I guess I'm just trying to understand if there's a historical period that you would point to that you think could be the opportunity for international activity outside of And, again, I appreciate that you guys have given us a ton of color on your visibility over the next two years, but I'm just trying to understand what, like, the ultimate opportunity could be for international rig redeployments aside from the substantial SONAD opportunity. Thank you.
spk02: Well, I gave you a pretty big list of those opportunities, and it's really going to be a question of – our prioritizing where we want to allocate the capital, what's best served is what I would put it. And as we think about that, some of the other logic I've talked about, which is technology and NDS also applies to international in terms of which opportunities we choose to pursue. So it's going to be a balance in terms of allocation of capital and what we want to pursue in terms of how fast we want to grow. But I think right now you're seeing an environment where There's not going to be a dearth of opportunities. The question is whether the returns on capital are good enough to meet our hurdle rates, and are they such that it makes one-on-one equal three when we pursue that opportunity? And I'll let William add anything to that.
spk03: Sure. I think Latin America, which is under, I would say, estimated piece of the pie, I think we have real opportunities to grow in places like California, Argentina and Colombia, where we already are the strongest player. And in Mexico on the platform rig market, we're getting a lot of pressure from Pemex to add rigs in that market as well. So I don't even want to mention Venezuela because it's still a little bit up in the air and how much the sanctions are going to be removed and how much some of our clients are going to go back to that. But we do have real opportunity. We have four rigs in prime condition in Venezuela waiting for a resumption in activity. by some of the foreign players. And then we have seen places like Kazakhstan that have gone down, but we don't know when that will come back. But I think if it does, we're ready for that as well. And then Kuwait, we have some very important tenders coming, and we are very well positioned in that market as well. Now, we mentioned that we got an award in Algeria for four rigs, which is a very impactful win for us. And we are looking at other places in North Africa as well to expand. So those are the areas where you would expect to see most of the uptick in neighbors. Now, we do have to be conscious that we cannot address all the opportunities that are out there. So we have to be selective. We have to focus, as Tony said, on places where you can get technology on top of the rigs. And we have to make sure we have a CAPEX a CapEx program for next year that makes sense in terms of our free cash flow objectives.
spk06: Great. Thank you both very much. I'll turn it back.
spk04: Thank you. And the next question is a follow-up from Derek Podhiser with Barclays.
spk05: I just wanted to follow up on the 11 rigs you highlighted, international, to be deployed by the end of next year. Is that a net number? Or I'm just wondering how we should think about that. Will we see some offsets, maybe some rig releases in other regions? I know you highlighted Kuwait and Colombia as areas of softness currently. Just thinking about if that 11 is completely incremental or we should think the 11 minus something.
spk03: Listen, the 11 is stuff that we have in hand already, but we have others that we have very high probability of getting. So the 11 could be higher, right? Now, it's true that in some places there could be some releases somewhere, but again, we have very long-term contracts all over the place. So right now we're not expecting to see reductions in other places.
spk05: Got it. Okay. Very helpful. And then just, I know, I know capital allocation strategy talked about it being towards debt reduction repayment, but considering just how constructive you are on NDS, I'm just curious how we should think about M&A opportunities, whether it's a tuck in or bolt on as far as technology or anybody else out there that can fold right into the, under the neighbor solution. Just thinking about M&A opportunities and how we should think about that.
spk02: I think you've hit on something that clearly has been on our radar for quite a while. And we have been looking and, you know, we've added some small software stuff that you haven't really seen much visibility to that's become part of our product lines as well. So kind of add to our internal growth with kind of small tuck-in acquisitions. And then we've also embarked on partnerships as well. Our example is Corva out there, which has a software product that we've competed with. But together, we think we can actually do one-on-one equals four. And the marketplace is not a big marketplace. I mean, there's only X hundred, 700 rigs in the international. I mean, altogether, maybe 1,500 rigs that are target rigs. It's not like Microsoft and Apple, which have a gazillion customers out there. So for the technology to work, it makes sense to try to work with incumbents and see if there's a way to make things work better. And so we've embarked on that path with some of these deals we've done, and we're open to it. We are looking at other similar deals, not just acquisitions.
spk03: I think we also deal with Halliburton, and I think it's going to be a creative for neighbors running solutions. And, of course, one of the big objectives that we have is to try to convince some of our peers to take our technology rather than redeveloping, reinventing the wheel themselves. And we have been having some success on that.
spk05: Great. Thanks for taking my follow-up, so I'll turn it back.
spk04: Thank you. And this concludes the question and answer session. I would like to turn the floor to management for any closing comments.
spk01: Thank you all for joining us this afternoon. If you have any additional questions or would like to follow up, please contact us. And with that, Keith, we'll end the call there. Thank you very much. Thank you.
spk04: And as mentioned, the call has concluded. Thank you for attending today's presentation, and you may now disconnect your lines.
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